News of Note
Foote – Tax Court of Canada finds that a senior stock broker realized gains on a small personal portfolio on income account
Email this ContentThe co-head of institutional trading at a full-service brokerage, who engaged in active stock trading in his personal account for the last 10 months of 2009 (with an average hold period of about 50 days), was found by Boyle J to have realized his gains on income account, notwithstanding the relatively small size of his portfolio (starting at $650,000) relative to his employment income, and the fact that he significantly underperformed the stock market. In addition to the active trading, Boyle J was significantly influenced by the taxpayer being involved in trading qua employee (i.e., the brokerage would take short-term positions for its own account, and the taxpayer “gleaned relevant market information as part of his daily job”).
Neal Armstrong. Summary of Foote v. The Queen, 2017 TCC 61 under s. 9 – capital gain v. profit – shares.
CRA notes issues on the GST/HST boundary line between qualified acupuncturist supplies and taxable supplies
The supply by a “practitioner” of acupuncture services was exempted effective February 12, 2014. One complication is that the profession is not provincially regulated in smaller provinces (Manitoba, Saskatchewan, Prince Edward Island, Nova Scotia and New Brunswick). CRA helpfully suggests that those with acupuncture practices in those provinces “contact the regulatory body in any of the regulated provinces to determine if their qualifications are equivalent to those necessary to be licensed or otherwise certified in that province,” so as to determine if they qualify as “practitioners.”
Mixed supply issues may also arise. CRA provides an impractical example of a dual-qualified professional who meticulously invoices for 40 minutes of acupuncture and 20 minutes of massage therapy, and states that it would assume that there were separate supplies of massage therapy (which is not exempted) and of acupuncture. A sale of herbal goods would also not be assimilated to the acupuncture supply (and would not be zero-rated as a grocery supply).
Neal Armstrong. Summaries of GST/HST Technical Information Bulletin B-110 “Application of the GST/HST to the Practice of Acupuncture” April 2017 under ETA, Schedule. V, Pt, II, s. 7, s. 1 – practitioner, Sched. VI. Pt. III, s. 1.
CRA indicates that the transfer of an oil and gas lease was not eligible for the s. 167 GST election
CRA indicated that the transfer of an interest in an individual “lease” of oil and gas property which may be operating under a joint venture agreement likely would not constitute a supply of part of a business for ETA s. 167 purposes given that this would not be associated with the transfer of any other assets and it might represent only one of the assets in a field held by the vendor.
Neal Armstrong. Summary of 3 February 2017 Interpretation 158436 under ETA s. 167(1).
CRA indicates that decommissioning work is of the type covered by the construction PE Article
A Canadian-resident company, which agreed to decommission various offshore oil or gas platforms, arranges for a non-resident affiliate to perform subcontract work at the same Canadian location in two separate four-month work periods (each covered by a separate subcontract) occurring in two successive years, and separated by a work stint of the non-resident for a separate non-resident customer.
CRA first confirmed that demolition and other decommissioning work comes within the scope of the standard OECD-based “construction PE” article (Art. 5(3)). Turning to the 12-month test therein, CRA indicated that the two work segments might very well be considered as a single unit, in which case the non-resident would be considered to have a Canadian permanent establishment if the work on the first segment commenced more than 12 months before the completion of the second segment.
Neal Armstrong Summary of 16 January 2017 External T.I. 2016-0655701E5 under Treaties – Art. 5.
CRA rejects the recognition of a loss on a s. 261 conversion to the U.S. dollar
Canco had all along been preparing its financial statements is U.S. dollars and then validly elected to adopt the USD as its functional currency effective the beginning of its 2015 taxation year. It proposed to recognize a loss for ITA purposes equal to the difference between (i) its USD retained earnings (“R/E”) balance in its 2014 USD balance sheet (used for financial statement purposes) and (ii) its “R/E for Canadian income tax purposes” resulting from converting its December 31, 2014 R/E into USD under s. 261(7)(h) using the December 31, 2014 relevant spot rate. (There, that was easy to say!)
CRA identified a fundamental flaw: s. 261 does not recognize gains or losses on the conversion, and the conversion only affects the computation of subsequently realized (or otherwise recognized) amounts. In any event, Canco’s year-end retained earnings are not an amount “that is relevant in determining the Canadian tax results” and, therefore, are not to be converted under s. 261(7)(h). For instance, the retained earnings that is referenced for thin cap purposes is the retained earnings in the opening balance sheet contained in the financial statements used for accounting purposes.
Neal Armstrong. Summary of 2 March 2017 External T.I. 2016-0633981E5 under s. 261(7)(h).
Consistent use of Bloomberg, Thomson Reuters or OANDA FX spot rates generally is acceptable to CRA
What exchange rate will CRA permit a taxpayer to use as the “relevant spot rate” as an alternative to the Bank of Canada daily exchange rate? CRA indicated that the rates quoted by Bloomberg L.P., Thomson Reuters Corporation and OANDA Corporation would be “generally acceptable” as satisfying its criteria of being widely available on an ongoing basis, verifiable, and market-recognized. If such rates are used for ITA purposes, they must be used consistently from year to year and also used in the taxpayer’s financial statements – and be “used in accordance with well-accepted business practice” (which might mean something more than simply recording and storing them properly).
There is no mention of being allowed to average the exchange rates – and there is also no explicit discussion of how to select rates if the Bloomberg machine is providing continuous quotes throughout the day (although the “consistently” and “well-accepted business practice” references would have some bearing.)
CRA also states that:
The Bank of Canada rate will still be required in respect of a taxpayer transitioning into or out of income tax reporting in its elected functional currency in accordance with subsections 261(7) or 261(12)….
Neal Armstrong. Summary of 27 April 2017 Internal T.I. 2017-0684831I7 under s. 261(1) – relevant spot rate.
CRA states that a s. 149(1)(o.2)(iii) corporation is not generally precluded by the permitted investment rule from putting more than 10% of its assets in a single investment
A s. 149(1)(o.2)(iii) corporation is not permitted to make investments that are not permitted under the Pension Benefits Standards Act, 1985 (or similar provincial legislation). For PBSA purposes, the prohibition against a pension plan investing more than 10% of its assets in any one investment is applied at the level of the pension plan, rather than of a subsidiary pension corporation. CRA has determined that the policy intent of the permitted investment rule in s. 149(1)(o.2)(iii) (as well as of similar rules in ss. 149(1)(o.2)(ii)(B) and 149(1)(o.2)(ii.1)(B)(IV)) “is to defer to the investment requirements of the PBSA.” Accordingly, the same approach is to be followed under such s. 149(1)(o.2) provisions, i.e., the pension corporation is not precluded from investing more than 10% of its assets in a single investment.
Neal Armstrong. Summary of 21 December 2016 Internal T.I. 2013-0508321I7 under s. 149(1)(o.2)(iii).
Income Tax Severed Letters 3 May 2017
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
High-Crest and Birchcliff Energy – Federal Court of Appeal nullifies cases that were decided by a 2nd judge based on the trial transcript before the 1st judge
Rossiter CJ dealt with the difficulties of a Tax Court Judge in not being able to do much work by assigning the transcripts of some cases that that judge had already heard to other judges to reach a decision based on the transcript, where the parties were amenable to this approach rather than choosing to undergo a fresh trial.
A majority of the Federal Court of Appeal (Stratas JA dissenting) has now decided that the transcript-based decisions are nullities, so that these cases are being remitted back to the first judge (who is available) for decision (based inter alia on the same transcripts). Webb JA stated:
The general rule, as noted by the Supreme Court, is that a judge who is seized of a matter is the one who has the jurisdiction to continue with that matter. In my view, if Parliament intended to alter this rule to provide the Chief Justice with the power to remove a file from a judge who was seized of this matter, clearer language would be required.
Neal Armstrong. Summaries of High-Crest Enterprises Ltd. v. The Queen, 2017 FCA 88 under Tax Court of Canada Act, s. 14(2) and ETA, s. 191.1(1) – government funding and of Birchcliff Energy Ltd. v. The Queen, 2017 FCA 89 under Tax Court of Canada Act, s. 14(2).
Six further full-text translations of Technical Interpretations are available
Full-text translations of the French technical interpretation that was released last week and of five French technical interpretations released between April 8, 2015 and April 1, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 25 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You currently are in the “open” week for May.